Reference no: EM131071153
Suppose that an economist hypothesizes that the annual quantity demanded of a specific computer brand (QD)=Y-3P.
a. Which of these variables are endogenous and which are exogenous if we interested in constructing a theory that explains the determination of quantity demanded with emphasis on the effect of price?
b. What does the negative sign before the term 3P imply about the relationship between QD and P? What does the implicit positive sign before the term Y tell you about the relationship between income and quantity demanded?
c. Suppose for the moment that average income is given and equals $6000. Rewrite the demand relationship by inserting this value into the given expression above.
d. Assuming that average income equals $6000, calculate the values of QD when P=0, p=$500, P=$1000, and P=$2000.
e. Put the relationship between P and QD (assuming Y=$6000) on the grid, putting P on the vertical axis. Indicate the intercept values (X-intercept and Y-intercept) on each axis.
f. Assuming Y=$6000, calculate the change in the quantity demanded when the price increases from $1000 to $2000. Do the same for a price increase from $500 to $1000 and from $500 to $2000. Call the change in the quantity demanded ?QD and the change in the price ?P. (? means "change in")
g. Calculate the slope of the relationship graphed in previous part.
h. Now suppose that evidence indicates that the average income of consumers has changed to $9000. Plot the new relationship between P and QD and determine the slope and intercepts. How does this change affect the graph compared to the previous one? Calculate the quantity demanded for the list pf prices given in part (d) and compare these with those in part (d). Do you see a general pattern? Fill the blank in the following sentence: " All else equal, at any given price, higher income results in ( ) quantity demanded." [Notice: this is how we analyse the effect of changes in exogenous variables.]
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